IS PRIVATIZATION A SOLUTION TO THE UNDERDEVELOPMENT OF AFRICA?
Introduction
The
public sector consists of all those entities owned and or controlled by
government and those entities that are funded and, or regulated by government.
In Africa the creation of public enterprise was part of decolonization.
Post-colonial African countries associated capitalism with imperialism hence
the adoption of a state led development approach. Since independence public sector enterprise
was perceived as the most efficient way of organizing resources and spearheading
social and economic development. However, decades after independence Africa is
failing to challenge underdevelopment. Poverty
rates are high and literacy remains a challenge. Economic growth rates have
either stagnated or retrogressed. Access to basic social services like water,
electricity, health and education is remains a daunting challenge. This
development has led to the rethinking of the African strategy of development.
There have been arguments among development scholars and policy papers alluding
that the public sector in Africa is one of its major cause of under development
owing to its inefficiencies arising from a number of challenges (Soubbotina TP,
200:78, Jauch, H, 2002:4, World Bank 1994:99, Guseh 2001:40). That there is need for the state to roll back,
reduce its functions as a service provider and hand over many of its functions
to the private institutions which are deemed to be effective. This, coupled
with the rise of Neo-Liberalism as a model of development gave birth to the
Washington Consensus best practices package with privatization as a main
component. Privatization has been championed as the best alternative to the
current public sector enterprise and has emerged as a major condition for
financial assistance by the International Monetary Fund (IMF) and the World
Bank and other western aid agencies. Privatization defined in crude terms is
the transfer of ownership of enterprises to the private sector from the state.
However, in a broader sense privatization include aspects such as the removing
price controls on goods, deregulation, contracting and commercialization of
services as well as delegation of a service provision to a private sector
institution ((Juach, H 2002:7-8). With privatization countries are expected to
raise their revenue, increase economic efficiency reduce government
interference in the economy, promote wider share ownership, and introduce
competition among business and reduce poverty (Losch B, 2001:26). This means
many gains in development.
Drawing
examples from Malawi and Nigeria, this paper evaluate the arguments put forward
against the public sector performance and examines if privatization is a
solution to these challenges. The paper agrees that the public sector in Africa
has a number of critical institutional and structural bottlenecks that are
making the realization of development impossible. Therefore public sector
reforms such as privatization should be undertaken in order to overcome these
challenges and correct the inefficiencies which to a greater extent have been a
factor retarding development. Notwithstanding this, the paper maintains that
privatization alone is not a panacea to the challenge of underdevelopment in
Africa. In the context of Africa, where market failures are pervasive, the
state has a critical role to play in development. Moreover, even where markets
are developed successful privatization depends on the state creating an
enabling environment which cannot be derived from the market based mechanism.
Public Sector Problems:
How is privatization a solution?
Much
evidence suggest that the public sector in Africa has been inefficient. For instance, in Malawi and Nigeria despite
massive capital injection in public enterprises productivity remained marginal
and often declined. By the early 1990s Nigeria had invested about 800 Billion
Naira (approximately US$90 billion equivalent according World Bank estimates)
in state owned enterprise. However, out of this investment profits were just
below 10% annually (Abudullahi, I, pg1, World Bank 2011:1). In Malawi, the
state created about 40 public enterprises. However, public enterprise
contribution to the GDP had significantly gone down from 9.5% in 1980 to only
3.5% in 1986 despite consuming a larger share of finances (Stambuli K, 2002:5).
There are several reasons behind this
lack of efficiency in public sector enterprises.
One
of the major challenge of the public sector in Africa is that it grown too large
and have become cumbersome to manage effectively. The roles of the state have
been overextended to the extent that its efficiency to carry out collective
action problems has been compromised (Filipovic A, 2005:4, Therkildsen O
2001:5). Many enterprises have become difficult to monitor. In Malawi soon
after independence the government took over the provision of many services such
as health, education, postal services, agriculture, transport and education.
The centralized nature of government made it difficult to monitor the
performance of these institutions. In this case privatization can help the state
to refocus its roles on the provision of only those services which the private
sector cannot provide efficiently such infrastructure development specifically
the construction of roads and the setting up of institutions that will create an enabling
environment for the private sector. Moreover, the size of the public sector has
negative impacts on other micro economic variables such as inflation and
interest rate. The larger the public sector the higher the expenditure and this
means more money available on the market chasing a few goods. Reducing the rate
of inflation by limiting the scope of the state is one way of attracting
investments because foreign investments will flow towards countries whose
economies and predictable. Public enterprises have also an effect on lending
rates as state borrowing increases the demand for loanable funds and this also
crowds out the private. In Malawi the share of private sector in credit dropped
from 76% in 1973 to only 224% in 1987 while public sector share of credit rose
49% to 69% in the same period (Stambuli K, 2011: 21). Credit was also not given
on performance but rather on institutional alliances to political elites (ibid).
Privatization would therefore assist in
the depoliticizing of access to credit and promote the growth of credit markets
as lenders will give out loans to efficient institutions.
Related
to the problem of size is the overstaffing in most of the public sector
institutions. Privatization would help in the retrenchment of the redundant workers.
However, this may result into serious challenges if these workers are not
absorbed in the private sector which is normally the case in most privatization
cases. Jauch (2002:12) notes that the
wage of an African worker supports large families in both the rural and urban
areas. Privatization therefore may result into high poverty rates. For example,
the privatization of Malawi Telecommunications Limited, and David White Head
and sons led to massive employment layoffs. In Nigeria workers complained of
unpaid pensions and retrenchments after the privatization of the Nigeria Telecommunications
Limited (Olutayo, A and Omobowale A, 2011:346) Privatization demands timing.
Privatization in the times of economic crisis is likely to produce more
negative results as redundant workers will not be absorbed in the ailing
economy. Piesse notes that a period of economic crisis is not good for
privatization (Piesse, J pg12). This explains why Africa seems to have gained
little from the privatization process that was imposed on them through the
structural adjustment programs. Privatization in Africa was carried out in a
period when growth was declining.
Rigidity
is another challenge to Africa’s development. Unlike in the private sector
where operations are straightforward and time bound the public sector has
serious operational constraints. There is too much rigidity and bureaucracy in
public institutions resulting from too many rules and procedures. (Tambulasi
and Kayuni, pg. 334). Managers do not take into consideration circumstances. Officials focus on following rules such that
they are indifferent to the quality and urgency of a service. Unnecessary hierarchical
process in most public sector institutions and this tends to be time consuming
and leads to inefficiencies. In the case
of Nigeria the World Bank notes that “excessive bureaucratic controls and
government intervention are main factors affecting public sector performance”
(World Bank,2011:1) The public sector
has been rigid to adjust to changing environment in which they operate in order
to effectively meet client needs. It has not been responsive the demands of its
customers and this has led to poor service delivery. The Malawi immigration and
Malawi Road Traffic Directorate has failed to meet the growing demand for
passports and Licenses
The
public sector is also not profit oriented and therefore does little to improve
on service quality and its staff is not mindful of performance. The mindset of public sector employees “is not
geared towards service, and they treat the citizen not as a customer but as a
‘help-seeker” (Tambulasi and Kayuni,
2011: 335). They do not mind whether a client dissatisfaction with a product
will lead to their exit. Workers in public institutions know that their
salaries do not depend on the profits which a firm is making. This problem
seems to breed from the unavailability of clear performance appraisals in the
public sector which breeds into inefficient workers who are promoted not by
their performance but by the number of years they have served in an
institution. In Malawi this problem is not limited to public sector
institutions. It extends to private firms that are operating as natural
monopolies. The Electricity Supply commission of Malawi (ESCOM) has been
failing to improve in its service delivery despite been partly privatized. This
brings another important factor to pay attention to. Privatization needs to be
coupled with the establishment of rules that favors competition. Where
competition is not ensured privatization will not result in improvement in
service delivery and a change to efficient and innovative production
technologies. It situations where a firm operates as a monopoly improvements in
services will be minimal. Notice should
also be made that privatization may not resolve some allocation inefficiencies.
As observed in Nigeria Private firms by the logic of their objectives they
concentrated only in areas where they could yield a maximum profit (Losch, B,
2001:46). Thus, privatization has a huge potential of excluding the rural
masses from the benefits of development. Therefore, the state needs to devise
privatization strategies that integrate the rural communities. Inherent
inefficiencies also exits in some firms. In Nigeria only 12 percent of
Nigerians had metered access to electricity (many others had access through
illegal connections despite privatization (World Bank 2011:1)
The
public sector is also facing the challenge of corruption. The public sector has
been infected with rent seeking interest groups that have jeopardized the
efficient operations of the institutions. Senior public servants and
politicians try to influence public institutions to act in a way which benefits
them at the expense of institution survival.
It has been argued that in Nigeria
public corporations were centers of predatory corruption where officials
dishonestly extracted huge funds for personal aggrandizement and this left the
corporations inefficient (Olutayo, A and Omobowale A, 2011:1). During the era
of Kamuzu Banda senior civil servants and politicians established a rent
seeking system which extracted the surplus from the rural farmers through
ADMARC. ADMARC as a public corporation was used to extract profits from farmers
by offering low prices aimed at subsidizing the urban masses. This undermined
rural development. Rent seeking and corruption are the norms of the public
institutions and the state is difficult to monitor because of politics and this
necessitates privatization because the private sector which has shareholders
and is accountable to them and this promotes efficiency and performance because
the survival of the private sector is dependent on the level of confidence
which the shareholders have in them. When shareholders have lost the confidence
in the operations of the firm they will simply pull out and invest them in
entities that are more profitable and accountable. On the other hand, public
institutions are not accountable to anyone, though in principle they claim to
be accountable to the general public. Property rights in public sector
institutions are vague. The link between the managers and the public, who are
said to be owners is weak and this makes the monitoring of managers behavior to
be difficult. Chirwa has argued that in property rights theory the more
weakened property rights are, the less productively efficient will be the
enterprise (Chirwa, E, and 2001:6). Privatization overcomes this challenge by
establishing a clear property right system in which an enterprise owner has a
right to punish or reward the managers. Moreover, public institution easy
access to government subsidies and government-guaranteed loans effectively
remove the threat of bankruptcy (Soubbotina 2002: 78).
Though
in Nigeria privatization was undertaken to curb corruption as it was reasoned
that private owners were more competent to minimize corruption, privatization
process itself was riddled with corruption. Public enterprises were undervalued
and sold to technically inefficient producers undermining the core reason
behind privatization- promoting efficiency (Adebayo K, 2011:8). For instance a
firm which was established a capital of $1.5 billion was at $30million (ibid).
This points to the fact that if privatization is to workout in Africa the
public sector institutions of justice also need to be in order.
Patronage
involving private firms have also undermined the positive gains from privatization.
Busch’s notes that privatization in Africa has created new challenges such
political patronage leading to numerous cases of corruption (Busch’s, T, 2003:
1). In Zimbabwe, privatization of refuse collection fell into the hands of a
company owned by a politician which was collecting money payments without doing
the service. In Malawi the Muli brothers company had numerous contracts which
it failed to meet. The cash gate case has a number of companies which received
millions of money but they did nothing. Privatization success therefore depends
on a strong state with strong institutions to control corruption.
Public
sector institutions have resulted in increased budget deficit. In its provision
of basic social service like education health and infrastructure, the state has
been financially overstretched resulting to huge domestic and foreign debts.
Nigeria statistics indicates that government spent close to 265B Naira in
subsidies, waivers and transfers on public enterprises (Abdullahi, 288). Much
as the government social programs like subsidies in Malawi seem to be socially
beneficial to a greater extent they are detrimental to economic development.
The 60 billion kwacha which goes to the subsidy program to a greater extent is
a form of resource misuse considering that ADMARC also subsidizes its
maize. Moreover, subsidies promotes
unfair competition on the market and are disincentives to willing producers who
may not have access to the subsidies. This in turn affect commercial farmers
who may not be able to compete with their counterparts who have access to
subsidies. State divestiture will cut government expenditures and help restore
budgetary balance (De Walle N, 603). Privatization of some sectors will free up
some of the state resources and these finances will be invested in education,
health and infrastructure. Selling of public enterprise that consumes more will
enable capital raising. However, privatization in Africa seems to be failing to
achieve the objective of capital raising because the process has not been
transparent. The benefits which could be accrued from privatization have been
captured by the local capitalist. This case of underpricing of firms in Nigeria
best describes this concern
Privatization
will also facilitate the broadening of the tax base which increases government
revenue. More private companies means more revenue to support the fiscal
budget. In developing countries like Malawi much of the tax that government
collects is in the form of income tax from people’s wages. Due to limited
companies the state is forced to extract more from people and this leaves
nothing for the poor to save and invest in their lives. Excessive taxation on
income is one major cause of poverty. Privatization is a solution to this
challenge because the creation of private enterprises means a broader tax base
for the state. The funding that could go into such public institutions is
turned into revenue by the government. However, Busch’s (2003:12) expresses pessimism
on the connection between privatization and increase in revenue collection
arguing that privatization may result into numerous companies many of which not
registered and equipped with tax aversion skills. This indeed is a challenge facing countries like Malawi
where many private business operate at an informal level and where there are no
stringent laws on tax aversion. However this challenge can be overcome by
having a comprehensive regulatory framework. The state should establish a
comprehensive system of revenue collection.
Yet
another challenger for the Public sector in Africa that is impeding development
is excessive politicization of management operations and distributions of
services. This has resulted into
incompetence resulting patronage in the awarding of positions. Merit is out of
the equation in most senior public sector appointments. There is a lack of
skills or ability to do a task successful and major reason for this is mainly
improper qualifications, lack of training and experience.
What should be the role
of the state?
It
is worth noting a comparison of efficiency of the state and the private sector
is not easy to measure because the private and private sector have different
goals. It is noted that “while a private
enterprise tends to be assessed in terms of financial performance, a public
sector enterprise (PSE) may have multiple functions, such as commercial and developmental
functions” (Guseh 2001:38). Therefore, to assess PSEs with multiple functions
only in terms of profitability may not present an accurate assessment of the
performance of such enterprises (ibid). Thus, while the private sector is
driven by profit making as its measure of efficiency, the public sector serve two
functions: profit making and promoting social development of its citizens.
Therefore, it is even justified for the state to undertake investments that are
loss making financially but have more social gains. Where public sector
privatization has overlooked the social dimension of development it has led to
serious poverty challenges such as high levels of income inequality.
Privatization
in both Malawi and Nigeria and other parts of Africa has led to exclusion of
poor rural areas in development because they are viewed as unprofitable by
private sector service providers (Soubbotina: 200:78). The case of transport
best exemplifies this case. In Malawi before the privatization of the State Bus
company has resulted into a delinking of the rural areas from the urban
centers. In this era of privatization access to transport service in the rural
area is tough this is a distribution inefficiency on part of market led economy.
Zambia also faced a similar challenge after the privatization of the united bus
company which stopped operating in rural areas where it used to operate before
privatization (Jauch H, 2002:12). Which meant people had to walk long distances
to access services like health and education. State intervention in the form of
incentives like tax reductions and subsidies to transport operators in rural
area can help resolve this problem especially considering that rural
development is an integral part national development strategic plans.
Market
failure in the provision of pure public goods with positive externalities
justifies state intervention. Development is not merely judged by the level of
income. Improvements in the social well-being is one of the main indicator of
development. So much as the state can seem to be venturing is activities with
minimal returns, its investments or lack of it may have long term effects. It
is against this background that a state is required to invest in pure public
goods such as education, health and security. Investment in education and
education is important because human capital is one of the major component that
will impact the operations of the private sector as the private sector itself
being profit oriented cannot be willing to invest in people’s education. Private sector operations will also need a
state to provide security. Nigeria is a good example where security is a major
challenge and this has had negative impacts in the attraction of foreign direct
investment.
The
state is also important to set standards regulate, and monitor the
privatization (Jauch H, 2002: 10). Where the private sector is left un
regulated it may result in the overproduction of good with negative
externalities like pollution from industries, and information asymmetries which
may result into unfair competition among the actors in the economy thereby
resulting into market failure.
Conclusion and Policy
Recommendations
Impact
of privatization has not been easy to deduce as evidence remains inconclusive.
In Nigeria privatization of 34 firms is reported to have led to an increased
performance of about 221% (Buchs, T 2003: 20). On other hand, Chirwa (2000:1)
notes that there is “no significant evidence that privatization in Malawi is
associated with high profitability, high sales efficiency, low output, low
employment”. Instead there is much
evidence in their study pointing to the declining intensity of investment.
This, however, may be a result of either institutional or other structural
bottlenecks. Privatization should be treated as a part of a larger system whose
effectiveness largely depend with its interactions with other variables. Megginson
and Guriev points out that the effect of privatization depends on economic
institutions such as the rule-of-law, competition, hard budget constraints,
quality of governance and regulation[1].
Privatization will also depend on the efficiency of the new owners of the means
of production and their ability to introduce new methods of production that are
efficient and capital saving. In general, privatization just like any other
reform cannot have immediate effects, however it is worth undertaking.
Privatization
is a process and solution, a means to an end, not and end in itself. As such despite
challenges that come with the privatization process African countries needs to
implement its policies in order to overcome development challenges. For privatization
to have far reaching impacts there is need for the state to development a
comprehensive framework that will enable competition among the privatized
companies. The state also needs to build coalitions to support the pro
privatization agenda and make sure that
transactions in the privatization process are transparent and the money accrued
is spend in a prudent way. Privatization results into exclusion of the poor
people, high rates of unemployment, and therefore higher levels of poverty. The
privatization framework should be developed in a way that in examines the
impact of privatization on various stakeholders, more especially the poor
people who are seriously affected by privatization reforms. To this effect it
is necessary to devise social safety nets that will prevent people falling into
poverty
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